Is your money safe? PPF vs FD during economic downturn
What's the story
In a falling economy, if there is one thing that investors want, it is a safe space to park their money. In India, two such safe spaces are the Public Provident Fund (PPF) and Fixed Deposits (FD). Both offer unique advantages and security during volatile market conditions. This blog post explores how each investment fares during an economic downturn, providing insights to help investors make informed decisions.
Stability
Stability of PPF in recession
The Public Provident Fund (PPF) is a government-backed scheme with the highest safety. During downturns, while other investments may suffer, PPF continues to offer stable returns in the range of 7% to 8%. This is because PPF rates are not subject to market volatility. While other investments may experience significant drops in returns, PPF serves as a strong shield, offering stability during economic turbulence.
Interest rates
FD interest rates during downturns
Bank Fixed Deposits are also a preferred option for low-risk investors in India. However, in a recession, banks tend to reduce FD interest rates following the cuts in the repo rate by the Reserve Bank of India. So, any new FDs opened or old ones renewed during a recession would attract lower interest rates, usually between five percent to six percent. This impacts the overall returns for investors.
Taxation
Tax implications on investments
Taxation is a key consideration when contrasting PPF and FD investments. PPF holds a distinct advantage as the interest earned is entirely exempt from tax under Section 80C of the Income Tax Act. Conversely, FD interest is subject to taxation based on the individual's income tax slab rates. This discrepancy can notably affect the net returns from these investments, particularly for individuals in higher tax brackets.
Liquidity
Liquidity concerns during recession
Liquidity is key in times of recessions, as it enables investors to quickly turn their assets into cash. PPF permits partial withdrawals after five years but with limitations. FDs, on the other hand, provide excellent liquidity as you can break them prematurely at any time. The penalty on interest for doing so varies from bank to bank.
Decision making
Choosing between PPF and FD
The choice between PPF and FD during a recession hinges on an individual's financial objectives, risk appetite, and liquidity requirements. Long-term investors aiming for tax-free compounding may favor PPF despite its liquidity constraints. Conversely, those requiring immediate access to their funds or seeking to capitalize on short-term interest rate fluctuations might choose FDs, despite the lower returns and potential tax liabilities during downturns.